Vermilion Energy Inc. Downgraded To 'BB-' From 'BB' On Weaker Credit Metrics; Outlook Stable

  • S&P Global Ratings lowered its long-term issuer credit and unsecured debt ratings on Calgary, Alta.-based Vermilion Energy Inc. to 'BB-' from 'BB'.
  • Our '3' recovery rating on the unsecured debt is unchanged, indicating our expectation of meaningful (50%-70%; rounded estimate: 65%) recovery.
  • The downgrade reflects Vermilion's weaker credit metrics following the downward revision on our global oil and gas and local Canadian prices, which should result in funds from operation-to-debt in the 35%-40% range.
  • The stable outlook reflects our expectation that Vermilion's price realizations outside North America, and the company's competitive production costs in these regions, should ensure the company will maintain FFO-to-debt of 30%-45% and strong liquidity during the next 12-24 months.
TORONTO (S&P Global Ratings) Feb. 22, 2019--S&P Global Ratings today took the 
rating actions listed above. The downgrade reflects S&P Global Ratings' 
updated base-case scenario on Vermilion Energy Inc. with weaker-than-expected 
financial performance and cash flows driven by our expectations of weaker 
hydrocarbon prices persisting throughout our 2019-2020 cash flow forecast 
period. Our expectation of global oil and North American oil and gas prices 
remaining at reduced levels has led to the downward revision of our global 
crude oil and gas prices and Canadian local prices. Furthermore, as hedges in 
place roll off in 2020, we believe the company will be unable to lock in 
attractive prices for 2020 and beyond.

We are now foreseeing two-year (2019-2020), weighted-average FFO-to-debt of 
35%-40%, down from our previous expectation of 45%-60%, spurred by our 
decreased hydrocarbon price assumptions. We are forecasting average daily 
production of 101,000-106,000 barrels of oil equivalent (boe) per day in 2019 
(57% liquids), and we expect Vermilion to continue generating positive 
netbacks in each of its operating regions given its competitive production 
costs in each of its upstream segments. 

We foresee capital expenditures of about C$530 million and the continued 
allocation of all free operating cash flow to dividend payments during our 
2019-2020 cash flow forecast period, resulting in neutral discretionary cash 
flow in the next 24 months.

The stable outlook reflects our expectation that Vermilion's price 
realizations outside North America, and the company's competitive production 
costs in these regions, should ensure the company will maintain FFO-to-debt of 
30%-45% and strong liquidity during the next 12-24 months. We also expect 
profitability metrics will stay in the midrange of the global E&P peer group.

We could take a negative rating action if Vermilion's fully adjusted two-year, 
weighted-average FFO-to-debt consistently fell below 30% due to a material 
increase in its upstream production costs, or weaker-than-expected average 
daily production or realized prices, at the same time that liquidity 
deteriorates.

We could take a positive rating action if the credit metrics significantly 
improves, resulting in two-year, weighted-average FFO-to-debt improving and 
consistently remaining in the 45%-60% range. We believe Vermilion's cash flow 
metrics could improve due to either increased production or realized prices. 
We could also raise the ratings if Vermilion continuously increases its 
reserve and production base and improves its profitability profile in the next 
12 months through an enhanced cost profile and lower finding and development 
costs.
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